Dave: "Naz could drop dramatically by simply shaving Market Cap off the top market cap 'winners' (which in many cases have no earnings). But would it kill the whole economy?"
Absolutely, over time. Many more people are invested in the bubble stocks than think they are. People who would never think of paying 150 times sales for a speculative internet stock, and instead, conservatively they think, put money into a S&P Index fund, starting today will be the proud owner of Yahoo as a piece of their portfolio.
Yahoo itself is just a conduit that renames IPO money as revenue. For example, let's say Peanutbutter.com goes public, raising $100,000,000 of which they immediately hand over $25,000,000 each to Yahoo and AOL for the right to be their exclusive peanut butter advertiser/vendor. Yahoo and AOL both, quite properly, call it revenues, everyone gets excited about their spectacular revenue growth, and their stocks go up.
Let the internet stocks go down for whatever reason and the flow of IPOs will dry up. Then where does Yahoo and AOL's next customer come from? Their stocks head south, partially dragging the S&P with it. Yeah, I know, the two of them are only a couple of percent of that index, but techs in general make up 27% of the S&P now, up from 10% five years ago (source: High-Tech Strategist). A lot of the revenues of the tech stocks consist of IPO money spent by the internets on equipment of various sorts, so a bear market in the internets will mean a bear market in the techs which won't be so good for all those so called conservative index funds.
Another factor to keep in mind is that profits as a percent of sales are at extremely high levels in almost every industry. One reason for that has been the trend of companies to substitute fixed costs (computers and information systems) for variable costs (workers). That provides operating leverage on the way up, but, guess what, provides negative operating leverage on the way down, as you can't cut costs by firing your computers. So once any slowdown in the economy gets rolling, you will see lots of companies reporting a 50% decline in profits on a 2% decline in sales.
I could go on, but you get the picture. The spending of money raised in public offerings has been one of the strongest positive forces in the economy is the last several years. When that ends, we will have at least a recession, quite likely spiraling down into something worse, as all the beneficial cycles turn into vicious ones.
Keep in mind that the economic purpose of recessions is to get rid of extra inventory throughout the system. But that isn't our problem; what we have, IMO, is excess capacity. There is another economic process that traditionally functions to eliminate that - it is called a "depression". |
